Petroleum companies are fleecing people?

Indian petroleum companies are shedding crocodile tears for no apparent reason.

Myth: 1] Indian oil Corporation has gone on record and stated that it incurred a loss of Rs 3,388.89 Cr in the first quarter of current fiscal as against a nett profit of Rs 3,682.83 Cr recorded in the first quarter of last year.

2] The Company made a net profit of Rs 10,000 Cr in 2009-10 and the Dy Chairman, Plg Commission states that this is inclusive of the 50% subsidies provided by the Government to the tune of Rs 20,000 Cr during 2009-10.
3] It is a fact that Government revised the prices of petroleum products by Rs 3/- in the last quarter of 2009-10, the benefit of which would have cascaded to 2010-11, and in the second instance, another adhoc increase, just a month ago, raising the price of petrol by Rs 3.50/litre, diesel by Rs 2.00, LPG Cylinder by Rs 35/-, Rs 3/per litre for kerosene. Kerosene is mostly used by the Below the Poverty Line families.

4] Oil companies contend that they incur $ 3 barrel on processing of every barrel of Crude oil. This year (April-June, 2010), they state that their gross refining margin (GRM) was Rs 7.36 per barrel.

5] The oil Companies admit that ‘refining margins were low due to inventory losses on oil as oil prices had come down compared to the closing stock(April 1).

While oil companies put forward such arguments to prove the acute under pricing in the import of crude, and the under recovery caused by the sale of oil, which is only 50% subsidized by the Government, they argue for increased prices from the consumer. Simple Law of demand and Supply pricing.

Reality: 1] One should go into the mathematical calculations of the purchase of Crude oil, quantity of Crude oil purchased, what is the demand: supply position of Petroleum products in India, how is the pricing done in the existing circumstances, and when there has been no appreciable increase in the petroleum prices in the international market, why are the Petroleum Companies in India are on a song, and hungry for more revenue? Now, how could the profit of Rs 3,682.82 Cr during the last first fiscal, turn into a loss, assuming that Government did not part with Rs 1,694.45 Cr as 50% of its share in the loss. This is only a notional adjustment in the balance sheet. Loss is a loss, whether it is subsidized by people or Government.

Dr B K Chaturvedi Committee went into the issue of usage of Kerosene oil in the Country. His findings have been documented. The study revealed that the use of kerosene has come down from 40% to 51% used earlier, only 1% is used for cooking purposes; out of 39% PDS Kerosene, 18% finds a way to the black market to adulterate diesel, 24% of rural consumption used for lighting is in villages where there is 100% electrification. Only 40% of the kerosene finds use. The rest is not used. Government’s subsidy for kerosene is Rs 17.92/a litre. What happens to the kerosene which is said to be distributed? The distribution is only in paper. Why can’t the Planning Commission do a detailed study to unearth the truth?

2] The truth is Petroleum companies’ profits are notched. They are virtual profits. How can any body say that factoring government subsidies, Companies make profit? These are monopoly Companies who are answerable to nobody.

3] During the year, the Government revised the petroleum prices at least on two occasions. Yet, why should there be a steep loss. Is it operational efficiency? Seepage? Misue?

4) How come such a vast change in refining? Has the government gone into the pricing of refining? In the first instance, they use the term cost of processing of Crude oil, and in the second case, they say gross refining margin. What does these two mean? Let the Economists of North bloc ponder over this aspect

5) The oil inventory showed it held excess stock. This stock had a price that was higher than the prevailing price as on 1 April 2010. The Oil Companies also admit that negatives on account of exchange losses due to Rupee depreciation and higher provisioning of bonds(the Government bonds that was given in lieu of 50% of the under recoveries). If they contend that these anomalies must be factored into the price of petroleum products, it is not fair and decent price determination.
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Due to dollar depreciation, the invoice value of crude import should have come down, as the prices are paid in dollars. There is a comfortable cushion in this. In India, you are selling in Rupees. You don’t link the price to the Dollar. Hence twin advantage. Please use the same matrix for comparison.

The Company argues that the nett revenue lost by IOC was Rs 11,013.58 Cr. It was compensated Rs 3,671.26 Cr from upstream firms like Oil & Gas Corporation, GAIL and Oil India. Consequent to non revision of retail selling price in line with the international prices, net under realization was Rs 7,341.59 Cr. The usual practice was that the Government reimbursed Rs 20,000 Cr for under recoveries of IOC, BP, and HP during 2010-11.

The oil Companies agree that the net sales during 2010-11 went up by 23% to Rs 71,257 Cr. IOC alone had 17.254 million tones of petroleum products against 16.703 million tones duing the corresponding period (April-June 2009) while it exported 1.058 million Tonnes. The Refineries refined 13.278 million tones of Crude oil against 12.466 million tones a year ago during March-June of 2010 and 2009. The refineries are said to have clamped Rs 6.50 per litre as charges.

The oil Companies do not do any homework and incapable of working an alternate strategy. One aspect that Planning Commission should look into the capacity of motor cars being sold in India during a year, and whether the present infrastructure has capacity to withstand them. Secondly, if the demand for petroleum products could be brought down through planning, it will have a cascading effect on the supply and pricing. Merely to boost the manufacturing output, if uneven growth in manufacture of motor cars is made, the infrastructure would break down. It is good to draw a road map to build 7,000 km of highway Roads. But the wear and tear, its optimum capacity and longevity are factors that needed to be factored in. It can’t be utopian. Banks find it easy to provide vehicle loan as the motorcar is a tangible asset. But whatever incremental growth that is achieved should be practical and long withstanding otherwise, it will become Robinson Crusoe paradox situation.

Preposterious decision to hike petro prices

The Centre, ignoring the Prime Minister’s Economic Advisory Council Chairman Shri C Rangarajan’s prophetic urge to tame the current inflationary situation which is a serious matter of concern, as the threat of inflation was initiatally confined to food articles (particularly cereals) have spread to manufactured products, has announced upward revision in Petroleum prices which will have cascading effect on the daily spend budget of the Common man. Shri C Rangarajan’s caution to the monetary policy makers to watch liquidity to keep the inflation under control has fallen on deaf ears of the GoM.

The Government’s stand is that the domestic price of Petroleum cannot be divorced from the way in which crude oil is behaving in the international market. This will only result in oil marketing companies incurring loss. Decontrolling the petrol price would mean the oil marketing companies will have the freedom in adjusting the prices as per Crude rates. If it was not done, the Government would have to find some way to meet the under-recovery of oil marketing Companies.

Inspite of Government having raised the price of petrol and diesel by Rs 3 a litre, around 3 months back, according to Government sources the present hike of Rs 3.50 per petrol, Rs 2 per litre per diesel Rs 35 per (LPG) cooking gas cylinder, and Rs 3 per litre of kerosene oil is a move aimed at narrowing down its fiscal deficit, and the generated funds will be utilized for Social schemes. The Government has forgotten the spiral inflation which continues to daunt and haunt the common man would make the present hike, a severe jolt in his monthly budget. The petrol prices will be de-regulated, and in the case of diesel there will be a partial deregulation with total decontrol happening in a couple of months. The Government accounts for an incidence of Rs 17.92 a litre on Public Distribution System kerosene, and Rs 261.90 per an LPG Cylinder. Public Distribution System prices should be admeasured with the subsidized prices for kerosene for Below Poverty Line people, whose statistics is inaccurate, as much as Planning Commission itself not having a correct tally of the actual BPLs on a state basis. Even the state data is incorrect. Kerosene oil is given at subsidized prices to non existent BPL families and for lighting purposes when the recipient village is 100% electrified. There are cases when PDS Kerosene is diverted to black market. Yet, unconcerned to plug the loopholes, the Government has thought of a straight jacket hike which will squeeze the middle income groups. In the name of import of edible oils due to scarcity in the domestic market, Government is loosing annually Rs 24,000 Cr. The import is higher by 30% over requirement. Yet, no body is concerned over the loss to the exchequer.

It is an irony that the Petroleum Ministry justified the hike quoting the figures of kerosene in Pakistan, Bangladesh, Sri Lanka and Nepal. The Economic Advisor to the Government holds that regulation does not mean an act of raising prices. When the Government increases every quarter the prices of petroleum products by Rs 3 a litre, when the international prices of oil has not made any commensurate jump so as to warrant a hike, which would cause food inflation to frenzy heights, then what do we call the unjustified hike?

When Government fails to control prices to tame inflation, thinks in terms of only making available more spending for Social schemes, a populist act, it is doing a great disservice to the country and people, who voted them to power. The Common man has been treated shabbily and horribly. There will be spiraling effect on transportation and freight costs. Railways alone will have its fuel bill jacked up from Rs 4,500 Cr to Rs 5,000 Cr. per annum. Likewise, the petrol and diesel bill of Government cars would go up, disproportionately, causing a huge drain on the exchequer. The Finance Ministry had experimented with various measures but continuously failed. The prime minister of India, need to be cautious on this, as Government is not in control of the runaway inflation. The monetary and economic policies of the Finance Ministry cause more distortions on the monetary system and economy than any other. FM has lost his control and grip on the monetary situation.

There is a strong historical “snap back” relationship between the strength of economic recovery and the severity of the preceding recession. Thus, recessions and their recoveries have a tendency to trace out a “V” shape. Because the current recession that began at the end of 2007 started out shallow and only recently became deep, a simple time series model of the “snap-back” dynamic implies that the current recession may have a lower-case “v” shape, although the fact that the economy is likely to continue to contract further before a recovery takes hold argues for the possibility of an upper-case “V”. On the other hand, because the current recession was brought on by a financial crisis, there is clearly more of a downside risk than upside risk to the predicted strength of recovery, even given a robust policy response. Meanwhile, in contrast to the “V” shape prediction based on a simple time series model, the MA forecast is more in line with an “L” shape to the recession and recovery, at least in the near term.

UPA II has pilloried the common man, with a spate of direct and indirect taxation, Bank’s interest rates has been tinkered, upsetting people’s appetite for going for Savings, which will show monetary instability in the medium to long run. . Interest rates need to be higher than inflation, so savers get rewarded for saving – which isn’t the case right now. The banks will fret and fume, but they belong to the people after they were nationalized. The objective was to serve the people and not help the billionaires get into Forbes list. The people who save or put the money in the Bank are the oldies; and not the smart professionals who get 5 figure salaries. These people who paid their taxes regularly also need the support of the Government as much as the BPL. They just want a reasonable interest on their money, not alms from Government. These savings do not cause inflationary growth, as the savings are too little for the old man to spend for his living.

If you don’t act now, you will never get the opportunity. Sooner or later, our economy is expected to collapse like the World Trade Centre.